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In New Zealand, becoming a sole trader is the easiest way to start professionally working or start your own business. New Zealand is one of the easiest places in the world to do business as your own operator, and the process for becoming a sole trader is relatively simple. There are many benefits, including flexibility and a lack of start-up fees. This article will explain what a sole trader is, how to become one, and some legal obligations to keep in mind.

What Is a Sole Trader?

Being a ‘sole trader’ means starting a business or professionally contracting on your own, without registering as a company. Many small business owners, contractors and other self-employed people begin as sole traders. You can get up and started very quickly, with low start-up costs and no legal or registration fees. You also control the business and get all the profits. There are also some tax advantages like offsetting losses against other income and other legal entitlements.

However, there are some disadvantages. You are personally liable for all debts that your business might accrue, unlike a limited liability company. This means your personal assets, such as your car or house, might be at risk if things go wrong with the business. Sole traders can also struggle to get loans or investments relative to companies. However, you can change your business structure at a later stage if you want to switch to a company. Starting as a sole trader is a great first step that gives you some flexibility later on.

How to Become a Sole Trader

It is straightforward to become a sole trader. There are no legal or registration fees. You will need:

  1. a personal IRD number for paying income tax and goods and services tax (GST); 
  2. government licences and permits for your particular specialty, if relevant; and
  3. qualifications or registrations for your trade or profession, if relevant

Additionally, you need to tell Inland Revenue you have become a sole trader, and if you earn more than $60,000 a year, you will need to register for GST.

You can also get a New Zealand Business Number as a sole trader, a useful number and identifier which any business can have – not just companies. It is a good idea to get one, for a range of reasons including building credibility and speeding up interactions with suppliers and customers.

Legal Obligations for Sole Traders

While your obligations are fewer and less complicated than for companies, there are still some legal obligations to note.

The first is income tax. As a sole trader, your net profit (what you earn after paying work expenses) is taxable through your person IRD number. How much you earn each financial year will influence the amount of tax you must pay. As a sole trader, you must file an IR3 income tax return each tax year. 

From your second year as a sole trader, you may have to pay provisional tax. Provisional tax is when you have a system of paying instalments of your income tax based on your expected income over the year (based in part on your first year). There are advantages here for savvy sole traders. If you pay all your provisional tax early, before the financial year-end on March 31, you may qualify for a 6.7% income tax discount.

It is a good idea to get expert advice from an accountant or tax specialist when considering this.

Registering for GST is another legal obligation if you sell a product or service (including your own personal services or labour) and you think you have or will earn more than $60,000. GST of 15% is added to the price of most things for sale. If you are GST registered, you can claim back GST you pay on items you buy for your business.

Key Takeaways

It is straightforward to become a sole trader in New Zealand. If you want to go into business for yourself, it is cheap and quick to start work as a sole trader, particularly in comparison to starting a company. You need a personal IRD number to pay income tax and GST for your business. Additionally, you need the relevant permits or licences to operate your business in whichever field you choose. After that, you pay income tax and provisional tax. Also, you may have to register for GST if you earn more than $60,000. You always have the option of restructuring your business as a company later on, particularly if the business grows quickly.

If you want to know more about becoming a sole trader, contact LegalVision’s New Zealand business lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

What is a sole trader?

Sole traders have a business or professionally contract on their own, without registering as a company. They are entitled to any profits and are liable for any debts from the business.

Are there legal or registration fees for becoming a sole trader?

No, there is not. Becoming one is easy and affordable in New Zealand.

Do sole traders have to register for GST?

Yes, they do, if they earn (or expect to earn) more than $60,000 per year.

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